The role of banks in international trade is crucial. The banks provide financing products such as letters of credit, forex and helps to reduce risks and allow transactions to go smoothly for importers and exporters worldwide. Because of the worldwide trade, commerce, and finance, forex markets tend to be the world’s largest and most liquid asset markets. Nostro and Vostro accounts helps ease foreign exchange in international trade.   

NOSTRO

A nostro account refers to an account that a bank holds in a foreign currency in another bank. Nostros, a term derived from the Latin word for “ours,” are frequently used to facilitate foreign exchange. The opposite term “vostro account” derived from the Latin word for “yours,” is how a bank refers to the accounts that other banks have on its books in its home currency.

A Nostro account is an account maintained by a domestic bank with a foreign bank in foreign currency. For example, State Bank of India has opened an account with Bank of America in New York for dealing in US Dollars, this account is called as the Nostro account for the State Bank of India. In the Nostro account, the domestic bank acts as the facilitator – in this case SBI is the facilitator.  A Nostro account with debit balances is considered an asset because domestic banks are often used as custodians to manage the bank’s operations regarding foreign exchange transactions. A bank recognizes the Nostro balance in the account as a debit balance with other banks and hence recorded as the bank’s assets on the balance sheet.

Nostro accounts are usually held by banks and large corporations that are involved in international trade. By holding funds in another bank in a foreign currency, the bank can conduct international trade transactions and foreign exchange without having to convert its local currency into foreign currency. Nostro accounts work by allowing one party to hold money in a bank in a foreign country in that country’s currency. When transactions are conducted through a nostro account, the bank that holds the account aids in completing transactions involving different currencies.

VOSTRO

A Vostro account is an account maintained by a foreign bank with the home currency of that bank. In the Vostro account, the foreign bank acts as the facilitator. Hence SBI’s opening   Vostro account with Bank of America, makes Bank of America facilitator. Vostro means yours. A Vostro account with a credit balance is considered a liability, and a vostro with a debit balance (a loan) is an asset. Another example of such an account is SBI holding a vostro account in HSBC. Several banks, including HDFC Bank and UCO Bank, have opened as many as 30 special vostro accounts to facilitate overseas trade in the rupee. Sberbank and VTB Bank — the largest and second-largest banks of Russia, respectively are the first foreign lenders to receive the approval from RBI. The move to open the special vostro account clears the deck for settlement of payments in rupee for trade between India and Russia, enabling cross-border trade in the Indian currency, which the RBI is keen to promote. RBI announced the guidelines on overseas trade in the rupee in July 2022.

The Government of India has allowed 20 Russian banks, including Rosbank, Tinkoff Bank, Centro Credit Bank and Credit Bank of Moscow have opened Special Rupee Vostro Accounts (SRVA) with partner banks in India. All major domestic banks have listed their nodal officers to sort out issues faced by exporters under the arrangement.

Additionally, it is anticipated to facilitate trade with Russia and other nations subject to sanctions. The RBI’s finalized mechanism allows authorized dealer banks in India to open special rupee vostro accounts on behalf of partner banks. The authorized dealer bank will then need to present the specifics of the arrangement to the central bank for approval.

Domestic banks use Vostro account to provide international banking services to their clients who have global banking needs. Vostro is an integral offshoot of correspondent banking that entails a bank or an intermediary to facilitate wire transfer, conduct business transactions, accept deposits and gather documents on behalf of the other bank. It helps domestic banks gain wider access to foreign financial markets and serve international clients without having to be physically present abroad.

The SRVA is an additional arrangement to the existing system that uses freely convertible currencies and works as a complimentary system. For perspective, freely convertible currencies refer to currencies permitted by rules and regulations of the concerned country to be converted to major reserve currencies like U.S. dollar or pound sterling and for which a fairly active market exists for dealings against major currencies. The existing systems thus require maintaining balances and position in such currencies.

Functioning of SRVA

The framework involves three important components: invoicing, exchange rate and settlement.

The framework entails three important components – invoicing, exchange rate and settlement.

1. Invoicing entails that all exports and imports must be denominated and invoiced in INR.
2. The exchange rate between the currencies of the trading partner countries would be market-determined.
3. The final settlement also takes place in Indian National Rupee (INR).

How much money do you think is in nostro vostro accounts worldwide?

There are $27 trillion dollars resting in nostro and vostro accounts to fulfill payments. Let that sink in for a moment, there is $27 trillion of “dead capital” laying idle for days on end in these accounts.

Bank rate

It’s the rate charged by the central bank for lending funds to commercial banks.

Balance of Trade

 It’s the difference between the monetary value of a nation’s exports and imports over a certain time period. It is usually expressed in the unit of currency of a particular country.

Black Market

The buying and selling of goods or foreign money in an illegal way.

Black economy

It’s a section of a country’s economic activity that is derived from sources that don’t follow the country’s rules and regulations regarding commerce and trade. The activities are mostly illegal in nature.

Brown economy

It’s an economy that depends on the economic growth of the petrochemicals such as coal, petroleum and natural gas, which in production, great amounts of carbon dioxide and soot are released into the atmosphere. The economic development depends on restricted resources, the environmental pollution is severe.

Blue Economy

Blue economy is a term in economics related to the exploitation, preservation and regeneration of the marine environment. Its scope of interpretation varies among organizations. According to the World Bank, the blue economy is the “sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem.

Capital

It’s typically refers to cash or liquid assets being held or obtained for expenditures.

Cost

In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost.

Consumer Sovereignty

Consumer sovereignty is the economic concept that the consumer has some controlling power over goods that are produced, and the idea that the consumer is the best judge of their own welfare.

Demand  

Demand is an economic principle referring to a consumer’s desire to purchase goods and services and willingness to pay a price for a specific good or service. 

Economics

It’s the study of how people allocate scarce resources for production, distribution, and consumption, both individually and collectively.

Elasticity of Demand

It’s the responsiveness of the quantity demanded of a commodity to changes in one of the variables on which demand depends. In other words, it is the percentage change in quantity demanded divided by the percentage in one of the variables on which demand depends.

Equilibrium

In economics equilibrium is a condition or state in which economic forces are balanced. In effect, economic variables remain unchanged from their equilibrium values in the absence of external influences.

Economic Benefit

Economic benefits are defined as tangible benefits that can be measured in terms of revenue generated or money saved through the implementation of policies. An economic benefit is a benefit that we can quantify in monetary terms. Profits, net cash flow, net income, or revenue, for example, are economic benefits.

Fiscal policy

Itrefers to a government’s spending and how it affects the economy, particularly if spending levels change. Fiscal policy also refers to the tax policies of a government to influence economic conditions. It drives the policy actions of the Government. Budget, tax, subsidies, expenditure etc. form part of the fiscal policy.

GDP

Gross domestic product (GDP) is the standard measure of the value added created through the production of goods and services.  

Golden Economy

The term describes an ideal state for an economic system. In this perfect state, there is full employment, economic stability, and stable growth. It is also called sunshine economy. Emphasis is laid on energy sector. Sunshine Economy depend on non-fossil energy such as wind energy, solar energy, water, biomass energy, geothermal energy, marine energy etc. as basic energy supply to encourage distribution of facilities, to improve the energy structure.

Government spending

It refers to money spent by the public sector on the acquisition of goods and provision of services such as education, healthcare, social protection; the important areas being social welfare and defence.

Grey Market

It’s an unofficial market in goods that have not been obtained from an official supplier.

Grey Economy

The informal economy is also known to be the grey economy. This is an economy that is a diversified set of economic activities, enterprises, jobs, and workers that are not regulated or protected by the state. The grey economy helps to establish self-employment in small, unregistered enterprises. It has been expanded to include wage employment in unprotected jobs.

Green Economy

It’s a three-dimensional focus in sustaining and advancing economic, environmental and social wellbeing, to increase GDP and reduce poverty. A green economy is an economy that aims at reducing environmental risks and ecological scarcities, and that aims for sustainable development without degrading the environment. It is closely related with ecological economics, but has a more politically applied focus.

Incentives

In economics, incentives are what encourage an individual to act in a certain way. In other words, how consumers and businesses respond to market signals such as prices and financial benefits.

Inflation

Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.

Law of demand

It states that quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded.

Market

It’s a place where the exchange of goods and services takes place as a result of buyers and sellers being in contact with one another, either directly or through mediating agents or institutions.

Money

It’s a medium of exchange; it allows people to obtain what they need to live. Bartering was one way that people exchanged goods for other goods before money was created. Money has worth because for most people it represents something valuable. The units of measurement are dollars or another currency, with no time dimension.

Market capitalization

It’s the aggregate valuation of the company based on its current share price and the total number of outstanding stocks. It is calculated by multiplying the current market price of the company’s share with the total outstanding shares of the company.

Marginal utility

It refers to the amount of satisfaction a consumer gets by consuming a good or service. Marginal utility can be used by economists to measure how much of a good or service a consumer would buy in a given period of time.

Macroeconomics

Macroeconomics is a branch of economics dealing with performance, structure, behaviour, and decision-making of an economy as a whole; for example using interest rates, taxes, and government spending to regulate an economy’s growth and stability. This includes regional, national, and global economies.

Microeconomics

It’s a branch of mainstream economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.

Monopoly

It’s a market situation where there is a single seller in the market. In conventional economic analysis, the monopoly case is taken as the polar opposite of perfect competition. By definition, the demand curve facing the monopolist is the industry demand curve which is downward sloping.

Micro Economics

Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources, and prices.

Macro Economics

Macroeconomics focuses on the performance of economies; changes in economic output, inflation, interest and foreign exchange rates, and the balance of payments. 

Opportunity cost

What a business firm misses out on when selecting one option over another. It’s a way to quantify the benefits and risks of each option, leading to more profitable decision-making overall.

Oligopoly

An oligopoly is a market characterized by a small number of firms who realize they are interdependent in their pricing and output policies. The number of firms is small enough to give each firm some market power.

Optimization

It’s the process of making a trading system more effective by adjusting the variables used for technical analysis. A trading system can be optimized by reducing certain transaction costs or risks, or by targeting assets with greater expected returns.

Purple Economy

Purple Economy takes into account the ethnic, cultural, and sociological aspects of the place they operate in. Concepts such as racial equality, cultural transmission, and economic anthropology are the core tenets of this principle which draws from the ideas of both politics and capitalism. It is about looking beyond the economic value of cultural outputs to include the cultural dimension of any asset or service. Purple economy is part of a wider ethical approach.

Repo Rate

It’s the rate at which the Reserve Bank of India (RBI) lends money to commercial banks or financial institutions in India against government securities. Repo Rate in 2022 is 4.40%

Recession

In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending.

Red Economy

It’s related to the economy that is ruled by a government with style of communism.

Supply

 In economics, supply is the amount of a resource that firms, producers, labourers, providers of financial assets, or other economic agents are willing and able to provide to the marketplace or to an individual. Supply can be in produced goods, labour time, raw materials, or any other scarce or valuable object.

Scarcity

The gap between limited resources and theoretically limitless wants.

Sovereign bond

It’s a debt security issued by a national government to raise money for financing government programs, paying down old debt, paying interest on current debt, and any other government spending needs. Sovereign bonds can be denominated in a foreign currency or the government’s domestic currency.

Silver Economy

Silver economy is the system and structure of production, distribution and consumption of goods and services aimed at using the purchasing potential of older and ageing people and satisfying their needs, wants and consumption for a well living and health needs. All strategies are driven to face new challenges related to an ageing population (geriatrics), especially regarding technology services for wellbeing and health monitoring such as robotic assistance, electrical mobility, or health sports, including health tourism and green care.

Time value of money

It’s the concept that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the short-term.

Unemployment

It’s a term referring to individuals who are employable and actively seeking a job but are unable to find a job. Included in this group are those people in the workforce who are working but do not have an appropriate job.

White economy

Focuses on Digital Economy and how it changed business and trading for start-ups and entrepreneurs via digital.

Most enterprises shut down because they don’t understand finances and the management of money. Experienced investors understand this fact that there are few legitimate overnight successes and that realistically they will be lucky to see a return on their investment in the next decade. Many new entrepreneurs, eager to prove the merits of their great idea, make the mistake of entering the discussion with an unrealistic value of their company. Not being realistic about the financial situation of their startup from the beginning shows a lack of understanding and frankly also lack of maturity. Understanding the money flow is very important for growth of business. Ideally, an investor is looking for a company with a lucid and scalable business model they can get behind and help grow.

Each entrepreneur has some strength which helps them in certain areas. Some are good at marketing, some at operations, some are naturally good sales persons, and some are good negotiators. But, the fact is there are a handful of entrepreneurs who are truly accounting & financial savvy. Most entrepreneurs fail when it comes to preparing financial statements and managing their books of accounts.

There are few basic financial terms which are important to understand and discussed with potential bankers and investors. It’s important to be aware of them and to understand how they affect a business.

1. Assets: These are the economic resources a business has, including the finished products and partial finished products it has in inventory. The office furniture, the machinery, trademarks, and copyrights – anything tangible or intangible that is owns or controls to produce value and that is held by a company to produce positive economic value is an asset. Current assets include inventory, while fixed assets include such items as buildings and equipment.
2. Liabilities: This includes any debt accumulated by a business in the course of starting, growing and maintaining its operations. It includes bank loans, credit card debts, and payments s owed to vendors and product manufacturers. Liabilities can be divided into two major types: current, which refers to immediate debts (e.g. money owed to suppliers), and long-term debt, which refers to liabilities (e.g. loans and accounts payable).
3. Expenses: Business expenses are the costs the company incurs each month in order to operate: rent, utilities, legal costs, employee salaries, contractor pay, and marketing and advertising costs etc. To remain financially solid, businesses are often encouraged to keep expenses as low as possible.
4. Cash Flow: Cash flow in business is the overall movement of funds through the business each month. It includes income and expenses. Businesses track general cash flow to determine long-term solvency. Cash is coming in from customers or clients who buy the company’s products or services. If customers don’t pay at time of purchase, that goes in accounts receivables. Cash goes out of business in the form of payments for expenses, like rent, electricity bills, monthly loan payments, salaries and wages, taxes etc.

5. Bottom Line: This is the total amount a business has earned or lost at the end of the month. The bottom line is the last financial figure on a ledger. The term can also be used in the context of earning a business has made either increasing or decreasing. Bottom line is final total of an account or balance sheet.
6. Financial Report: A financial report is a comprehensive account of a business in terms of transactions and expenses, created to give a business oversight of its financial matters. A financial report may be prepared for internal use or external sources, such as potential investors.
7. Financial Statement: Similar to a financial report, a financial statement lists financial activities of a business. However, a financial statement is generally a more formal document, often issued by a lending institution. They are income statement which presents the revenues, expenses, and profits/losses generated during the reporting period, balance sheet, statement of cash flows and statement of retained earnings.
8. Cash Flow Statement: A cash flow statement shows the money that entered and exited a business during a specific period of time. It generally covers four main categories: operating activities, investing activities, financing activities and supplemental information. The cash flow statement shows what changes will be projected in balance sheet accounts and how income will affect cash and cash equivalents; it breaks the analysis down to operating, investing and financing activities.
9. Income Statement: It is also known as a “profit and loss statement,” an income statement shows the profitability of a business during a period of time. The income statement looks at a business’ revenues and expenses through all of its activities. The income statement is divided into two parts: operating and non-operating. The operating portion of the income statement discloses information about revenues and expenses that are a direct result of regular business operations. The non-operating section discloses revenue and expense information about activities that are not directly tied to a company’s regular operations.
10. Balance Sheet: A balance sheet gives a snapshot of the company’s financial situation at a given moment. This includes the cash it has on hand, the payable, outstanding and owner(s) equity in the business.

11. Profit and Loss: To remain financially healthy, a business must have a regular profit that exceeds its losses. Profits and losses are usually itemized on a profit and loss statement, also known as the income statement defined above.
12. Capital: In business finance terms, the money a business has in its accounts, assets and investments is known as capital. In business, there are two major types of capital: debt and equity. Debt is money borrowed and to be paid by the business to financers or banks. Equity is owner’s investment in business.
13. Accounts Receivable: This is the money that a company has a right to receive from its customers for providing them with goods and/or services. Usually the client is notified by invoice of the amount to be paid, if not paid, the debt is legally enforceable. On a business’ balance sheet, accounts receivable is often logged as an asset.
14. Depreciation: Over time, a firm’s assets decrease in value due to the time that has passed since it was purchased. It is a reduction in the value of an asset over time, due in particular to wear and tear. For tax purposes, a business can recover the cost of that depreciation through deduction.
15. Valuation: When a business seeks funding from investors, those investors want to know the overall worth of that business. This is accomplished through a valuation. Valuation is an estimate of the overall worth of the business. Valuation is the process of determining the economic value of a business or company. Business valuation can be used to determine the fair value of a business for a variety of reasons: this includes sale value, establishing partnership, and ownership. At times it helps in the entrepreneur in his divorce proceedings. Often, owners turn to professional business valuators for an objective estimate of the business value. Financial knowhow is important for both personal and professional life.